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Wednesday, February 19, 2014

Tax Court Ruling and IRS Rollover Guidance Don’t Add Up

A recent U.S. Tax Court ruling has set a lot of heads
spinning in the IRA administration world, running counter as it does to more
than two decades of IRS guidance. In the
case Bobrow v. Commissioner, the
Court looked at a situation where the taxpayer, Mr. Bobrow, had made two IRA
rollovers within a 12-month period. Each
rollover consisted of assets distributed from a different IRA. The Court disallowed Bobrow’s IRA rollover on
the grounds that he was limited to one rollover per taxpayer per 12-month period, not one rollover per IRA.

Why is this ruling drawing so much attention? Primarily because it runs completely contrary
to long-issued guidance provided by the IRS, the very agency that is now
advocating this new position without any prior warning. The ability to execute IRA rollovers on a one-per-IRA basis has been described in
detail in IRS Publication 590, Individual
Retirement Arrangements (IRAs), for at least 20 years, that evidence
readily available even now at the IRS’s own web site. It is not conveyed in a mere statement, but
in detailed examples provided to explain the sometimes-misunderstood rollover
limitations. The IRS’s own model IRA
documents, on which millions of IRAs are based, state in their instructions
“For more information on IRAs…see Pub. 590…”

It is relevant to share
the IRS’s own unequivocal guidance on the subject here. Looking back to 1994, the oldest version of
Publication 590 posted at the IRS web site, we find the following. “You can take a distribution from an IRA and
make a rollover contribution to another IRA only once in any one-year
period. … This rule applies separately to each
IRA you own. For example, if you have two IRAs, IRA–1 and
IRA–2, and you roll over assets of IRA–1 into a new IRA–3, you may also make a
rollover from IRA–2 into IRA–3, or into any other IRA within one year after the
rollover distribution from IRA–1. These are both rollovers because you have not
received more than one distribution from either IRA within one year.” The examples, now even moredetailed, continue in Publication 590 up
to the most current version.

Some point out that IRS consumer publications, like Publication
590, should not be given credence when compared to the Internal Revenue Code, regulations,
revenue rulings, notices, or the like. To
which I answer: how can this agency have spent uncounted taxpayer dollars over
the life of this publication—a publication that now runs to 114 pages—for us to
be told that its contents cannot be relied on by taxpayers? Are we not to take seriously the description
on the cover that flatly says “For use in preparing 2013 returns?” No citizen should be expected to go beyond an
official IRS tax publication and conduct research in the Internal Revenue Code
and arrive at a conclusion different than the IRS published guidance. More broadly, what is the purpose of the numerous IRS
publications on qualified plans, 403(b) plans, armed forces tax issues,
education benefits, health and medical tax benefits, and more, if taxpayers
cannot rely on their contents regarding potentially critical tax issues?

In rendering its Bobrow
v. Commissioner ruling, the Tax Court opinion stated that it relied on the
“plain language” of the Internal Revenue Code, and we are objective enough to
see how the Code could be construed as limiting annual IRA rollovers to one per
taxpayer, instead of one per IRA. That
said, when a regulatory body publishes their interpretation of a code section,
taxpayers should and really must be able to rely on it.

What's more, it seems unconscionable that the same agency
that cites “equity and good conscience” when granting taxpayers extensions to
the 60-day rollover limitation, would now ignore decades-worth of its own
widely promulgated and unequivocal written guidance, basing a new rollover interpretation
on Tax Code language it has ignored for that entire period. Where, pray tell, is equity in this IRS Tax
Court litigation, this disavowal of longstanding guidance to suit some
short-term prosecutorial aim?

Though few have pointed it out following this Tax Court
ruling, there is more one-per-IRA IRS
guidance than just Publication 590’s declaration and examples. The IRS actually drafted proposed regulation
language that mirrors the Publication 590 guidance. Proposed Treasury Regulation 1.408-4(b)(4)
states with respect to the one-per-year limitation that “this rule applies to
each separate individual retirement account, individual retirement annuity, or
retirement bond maintained by an individual.”
This language was proposed in 1981, and undoubtedly influenced IRS
technicians who drafted the rollover references now in Publication 590.

With the current high priority the Obama administration seems
to be placing on helping more Americans save for a secure retirement, I would
find it extremely contradictory and disappointing if the IRS were to reverse
itself and its own plan language guidance, and place additional limitations on
IRA transactions that this agency has blessed for more than two decades.

It is my hope that the Tax Court ruling in Bobrow will be overturned, and the IRS either
reaffirm the rollover interpretation it has consistently and unequivocally
supported or apply this “new” interpretation only on a go-forward basis with an
announced future effective date.